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Market Avenue

UPDATED: November 30, 2009 NO. 48 DECEMBER 3, 2009
Boom or Doom?
China's housing market continues to grow and expand alongside concerns of a potential asset bubble

Will the white-hot housing market continue to burst with vitality next year? The Chinese Academy of Social Sciences (CASS) said yes.

In a recently published report, the Annual Report on Development of Housing Market in China (2009-2010), the CASS said the real estate market is bound to proceed on a steady upward trajectory next year, though the fourth quarter is likely to see a modest leveling off.

After cashing in on skyrocketing prices, property developers now have little financial pressure to bump up supplies or tempt buyers with discounts, said Ni Pengfei, a senior researcher at the CASS and chief compiler of the report.

Meanwhile, demand remains strong as the real economic recovery begins to establish itself, said Ni.

This came as a surprise to many given how strong a rally the market has already experienced. Prospective buyers jumped off the sidelines for fear that they may miss out on a bull market, while real estate developers restarted projects that stagnated in tougher times. Newspapers are constantly filled with reports of thousands of homebuyers cramming into sales offices of new housing projects, snapping up hundreds of available apartments in a matter of hours.

The property prices in 70 large and medium-sized Chinese cities rose 3.9 percent in October from a year earlier, accelerating from a 2.8-percent rise in September, according to data from the National Bureau of Statistics (NBS). The prices in first-tier cities, like Beijing and Shanghai, have returned to, if not surpassed, the peak levels seen in early 2008. Meanwhile, sales nationwide measured by floor space jumped by a robust 48.4 percent in the first 10 months of this year.

Analysts believe the rebound has largely been driven by the government-led lending spree as well as easy access to mortgages, which could be used to fund expenditures. In addition, the return of international speculative hot money is expected to add fuel to the glowing housing market fire, they said.

Such euphoria should be a cause for celebration as the economy begins to see green shoots of recovery. But frothy increases in prices are also fuelling concerns of an unstable and dangerous bubble expanding in big cities.

One clear clue is that the average price-to-income ratio in Beijing has reached 27:1, five times the world average, according to data from the Bureau of Statistics of the Beijing Municipality. In addition, the average price-to-rent ratio neared 500:1 in the city, far above the international alarm threshold of 300:1, which sends out a clear signal that the foundation of the real estate boom is losing stability.

Fan Gang, Director of the National Economic Research Institute, attempted to draw attention to the culminating situation, citing that a risky asset bubble could be in the making.

Yao Jingyuan, chief economist of the NBS, warned consumers rushing to buy houses as a hedge against inflation that while consumer prices have shown signs of increasing, they have yet to translate into significant price swelling.

But tackling bubbles when growth remains the top priority proves to be a difficult task. It is hard to see how the government can successfully pour cold water on the real estate market that has been a pillar of the economic recovery without halting the country's overall progress, said the CASS report.

Wary of taking its foot off the accelerator, the government has waved aside recent calls to hold back its stimulus for the property sector. But the newly added renminbi loans in the third quarter fell sharply from the first two quarters, so it appears that the policymakers are trying to let air out of the bubble without prompting a complete burst.

The report suggested the government tighten mortgage access on purchases of second homes and luxury residences as a move to rein in speculative investments.

In the long term, the report said the country's housing prices will continue down a path of prosperity, citing rising land prices as a major driving force.

The cash-strapped property developers are scrambling to boost land reserves in an effort to lock up future returns, thus forcing up land prices. Local governments that expect to earn revenues from land sales are also encouraging the trend. Among the dozens of big cities involving land price increases, Shanghai, Beijing and Hangzhou have the greatest potential for such rises for 2012, said the report.

Meanwhile, the ongoing urbanization process is placing a floor under the real estate market, said the report.

In 2010, there will be nearly 200 million rural residents moving into cities, creating huge housing demands, said Ni.

The report added that China has made significant advances in the construction of affordable housing as part of the government's stimulus package. For example, investments on low-rent homes have amounted to 35.4 billion yuan ($5.2 billion) so far this year, 3.7 times greater than in 2007.

As the report pointed out, there are a number of problems yet to be addressed. The affordable housing program, while focusing on low-income urban residents, has left a number of rural migrants uncovered. The housing accumulation fund applies proportionally to a resident's salary, which in fact has widened the poor-rich gap. Aside from this, more efforts are still needed to strengthen supervision over the affordable housing program, said the report.

Main Points of the CASS Report

- The real estate market is bound to proceed on a steady upward trajectory in 2010, though the fourth quarter of next year is likely to see a modest leveling off.

- It is necessary for the government to tighten mortgage access on purchases of second homes and luxury residences as a move to rein in speculative investments.

- Property developers now face little financial pressure to bump up supplies or tempt buyers with discounts.

- Nationwide demand for houses will remain solid in 2020 due to favorable government policies and the country's ongoing urbanization process.

- Bubbles are forming in the real estate markets of big Chinese cities, especially Beijing.

- China needs to further improve its affordable housing program, such as improving the housing accumulation fund system and strengthening support to rural migrants.

- Land prices in major Chinese cities are bound to increase in the long run.

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